Bitcoinhis (BTC 0.37%) the price has doubled to a record high in the past 12 months. Four catalysts drove that rally: the endorsements of The first exchange-traded funds (ETFs) at the spot price of Bitcoin in January, its last four-year halving in April, the Federal Reserve’s two rate cuts and Trump’s presidential victory.

ETFs have made it easier for mainstream and institutional investors to invest in Bitcoin, the halving has reduced the rate of growth of Bitcoin’s supply by halving mining rewards, and Fed rate cuts will likely drive investors back to cryptocurrencies, stocks growth and more speculative. investments. The incoming Trump administration is also expected to reverse the Biden administration’s restrictions on the crypto market.

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All these tailwinds make the world’s top cryptocurrency an attractive investment right now. But as Bitcoin nears record highs, investors may also consider investing in smaller cryptocurrencies still trading below their all-time highs. Let’s take a closer look at Ethereum (ETH 3.99%)the world’s second most valuable cryptocurrency to see if it fits the profile as a more compelling buy than Bitcoin right now.

Differences between Bitcoin and Ethereum

Bitcoin is a proof of work (PoW) token that must be digitally mined with power consuming ASIC (Application Specific Integrated Circuit) miners. It has a finite supply of 21 million coins, and nearly 20 million of them have already been mined.

The difficulty of mining Bitcoin, which doubles with every four-year halving, gradually slows this process down. The last Bitcoin will probably be mined by 2140. This scarcity makes it more similar to gold, silver and other precious metals than other cryptocurrencies.

Ethereum, which hosts ether as its native token, was once a PoW blockchain like Bitcoin. But in 2022, it switched to the most energy efficient proof of stake (PoS) mechanism in a process called Fusion.

PoS tokens like Ethereum’s cannot be mined. Instead, its investors “stake” (or lock) their tokens on the blockchain to earn interest-like rewards. Unlike PoW blockchains, PoS blockchains also support smart contractswhich are used to develop decentralized applications (dApps), non-fungible tokens (NFT)and other crypto assets. That’s why the value of Ether is often tied to Ethereum’s popularity among developers, while Bitcoin is more commonly valued due to its scarcity.

Ether has no supply limit and there are approximately 120 million tokens in circulation at the moment. It became deflationary after The Merge two years ago, but its Dencun tax cut upgrade this year made it inflationary again. Ethereum investors try to limit their supply by periodically burning (removing from circulation) lots of tokens — but this process is not as predictable or transparent as Bitcoin’s scheduled halvings.

Why has Ethereum outperformed Bitcoin?

Ethereum’s price is up more than 50% over the past 12 months, but has underperformed Bitcoin and remains about 40% below its all-time high. Ethereum’s first spot-price ETFs were approved and started trading in July, but haven’t generated as much buzz as Bitcoin ETFs. Ether also didn’t seem to attract as many bulls as Bitcoin as interest rates fell, but rallied alongside Bitcoin and the broader crypto market after the presidential election ended.

Ethereum appears to be held back by two near-term challenges. First, Ethereum faces stiff competition from newer and faster PoS blockchains such as Solana (SOL -0.33%) and Cardano (ADA 1.72%). Second, its growing supply limits its price increases.

But in the long run, there could be other tailwinds. Ethereum’s next update, “The Verge,” will improve its security features and reduce hardware requirements so it can run on smaller devices like smartwatches and Internet of Things (IoT) dispozitive. UBS (UBS -2.24%) It also recently launched its first tokenized fund on the Ethereum blockchain, suggesting it is still a more stable PoS platform than Solana or Cardano.

So is it smart to choose Ethereum over Bitcoin?

Some bullish investors expect Ethereum to rise. VanEck’s Matthew Sigel and Patrick Bush expect its price to quadruple to $11,800 by 2030, while Ark Invest’s Cathie Wood thinks it could rise more than 5,600% to $166,000 until 2032.

However, I personally think it’s still smarter to buy Bitcoin instead of Ethereum. Bitcoin is like digital gold, so its value should stabilize and increase against most fiat currencies. Ethereum tokens are still inflationary, their supply is unlimited, it cannot be mined, and its future value will be largely defined by Ethereum’s usefulness to dApp developers and financial institutions. The price of Ethereum may continue to rise, but I doubt it will consistently outperform Bitcoin in the next few years.